Considering that the market has done nothing for the last few weeks, except bounce up and down in a very tight range, one would think that sentiment has cooled off from August's market crash. You would be wrong. The NAAIM sentiment survey released today shows that investment managers are practically on the ledge and ready to jump to their own deaths to escape this vicious market turmoil. Apparently, they just realized that their end of year bonus is not going to be filled with gold or jewels, but instead with a lump of coal thanks to their poor performance. NAAIM sentiment came in at 4.18, a level not seen since the March 2009 lows. This also means that investment managers are so depressed that they are almost completely net short (with leverage). It should be remembered that this is a contrary indicator. You generally make money by doing the exact opposite of these pigeons. Right now it is saying that we may be nearing an important low in the market. This is quite interesting because other sentiment indicators like the AAIII poll are not confirming excessive bearishness.

One thing to keep in mind when trying to use this indicator for market timing. Back in March 2009 when the market was bottoming, the NAAIM survey held below 10 for three weeks. So it is not a perfect timing indicator, but certainly one worth following.

All good trades must come to and end as they say. The time has come for my Sugar short. I caught a nice 14% downside move that was pretty much straight down. It would be piggish of me to press the short any further. When you trade on leverage, you cannot risk a large oversold bounce (you never know if it is the beginning of a large move higher or just a technical bounce).

So why did this trade work so well? Luck. When I shorted sugar the fundamentals were beginning to sour along with a negative technical backdrop. Furthermore, all soft commodities were weak during this period, which pressured sugar lower. In short, the general conditions favored lower sugar prices.

The endless and increasingly desperate rumors of an EU bailout was enough to juice the stock market higher today. The Dow closed up over 270 points. To me, this has ominous parallels to the October 2008 Tarp bailout of the banks. If you remember the market initially dropped when the US House of Criminals Representatives failed to surrender complete sovereignty to the major banks. A few days later, the big banks made the right payments to the right people to get the TARP bailout approved despite public opposition to the plan. Anyway, the key takeaway was that the stock market immediately began to crash after the passing of the TARP bill. Instead of restoring confidence, the bailout bill spooked the market. People started to freak out that the US financial system must be in deep trouble if it needed $700 billion in additional capital. After all, every Government official and Fed member had assured the market that "the fundamentals remain sound" and other lies.

Below is a chart of the S&P 500 between October 3, 2008 (when the TARP bill was approved) and October 17,2008. The market crashed 22% despite the bailout. The lesson from 2008 was that bailouts don't prevent markets from crashing. Are we repeating history?

A few days ago I mentioned that Sugar was a good short from both a fundamental and technical view. So far the trade has done well. The longs are currently in liquidation mode as market sentiment has changed dramatically. A few weeks ago the bulls were focusing on Brazil's weak crop estimates. Now, everyone is worried about the expected global sugar surplus of between 4-7 million tons for the 2011/2012 season. Furthermore, the risk on market sentiment has been turned off courtesy of Europe's financial implosion.

This situation represents trouble for the sugar bulls as the market is heavily long sugar. The sugar market is also at a key technical level. See chart below

March Sugar is currently trading at 25.84, which is just above the early August low of 25.38. If sugar fails to hold this level than it exposes 24 as the next downside target. If 24 is breached then we could see sugar fall to 22.

Volume, as you can see from the chart is starting to pick up as spec longs sell their losing positions. Adding to the bulls' woes, the CME's margin hike made it a little more expensive to hold sugar.

With the market gyrating back and forth with no real conviction either way, I have been looking for uncorrelated trades, which can protect me from the non-stop risk on/risk off algo controlled market. Well I think I have found an interesting short opportunity: Sugar.

Below is a chart of SGG, the ETF which tracks Sugar.

You can see from the technical setup that Sugar is looking very heavy, with a possible double top pattern. Along with a weak technical picture, Sugar also faces poor fundamentals. The market is expected to be in surplus of at least 5 million tons for the 2011/2012 season. The only news that supports the market is a lower than expected harvest out of #1 exporter Brazil. However, this decline in output will be easily offset by record crops in Thailand, Europe, and India, along with strong harvests out of Russia and Ukraine. So we have a situation where the price of sugar has been bid higher on Brazilian crop concerns, but this should be short lived as market participants realize that the market will be well supplied.

Another reason I like this trade is because sugar has a very low correlation with the stock market (around 0.1), which provides at least some diversification.

Finally, the sugar market is dominated by long speculators right now. Non-commercial traders are currently long 155,000 contracts, meaning that they will be quick to sell on any decline. Another bearish indicator is the fall in open interest, signaling a lack of conviction in this latest up move.

The trade is pretty simply. Short SGG with a stop at 105.

UPDATE 9/16/2011---Well obviously I got really lucky on my timing on this trade. At the time of this writing 11:18 am pst, Sugar is down over 5% on a Canplan report, which suggests the Brazilian sugar crop will be stronger than expected. I am still short. There will much more long liquidation in the days to come.

With the recent chaos in global markets, merger arbitrage spreads have widened considerably. This has made the risk/reward more favorable, allowing enterprising investors to take advantage. Below are some of the best opportunities in the merger arbitrage area:

I don't normally like merger arbitrage because the risk is generally too high and the reward is too low. However, with these kind of annualized returns and ZIRP by Banana Ben and his merry traitors at the Fed, these look like good opportunities, without having to bet on the direction of the stock market. After all, anything is better than 0% at your bank.

Warning: Merger Arbitrage often seems likes a sure thing...and it is until one of the deals falls through and you watch the stock drop 20-30%. The deals listed above are both all cash deals and have a very high likelihood of going through. But no guarantees.

Here is a list of EU banks with the highest amount of exposure to Irish debt default . The data is based on the EU stress test results . ...

Words of Wisdom from Leonardo da Vinci

1. I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do.

2.Simplicity is the ultimate sophistication.

3.Life well spent is long.

4.Life is pretty simple: You do some stuff. Most fails. Some works. You do more of what works. If it works big, others quickly copy it. Then you do something else. The trick is the doing something else.

5. Marriage is like putting your hand into a bag of snakes in the hope of pulling out an eel.

Translate Page

Wikinvest Wire

Copyright 2010-2014Black Swan Insights--ALL RIGHTS RESERVED--This material may not be published, broadcast, rewritten, or redistributed. However, linking directly to the page is permitted.

I am not an investment adviser and nothing on this site should be interpreted as investment advice. Please consult with your own financial adviser before investing in the stock market or any financial asset. This blog and its author is not responsible or liable for any misstatements and/or losses you might sustain from the content provided. (I know this is a stupid statement but for legal purposes I have to say it. Thanks)